FMAC 503 Final Individual Assignment
December 2014
Guidelines
Communicate your answer in a simple, clear way.
· Show all of your work in a Word document.
· Fit your work onto 8 ½ x 11 inch pieces of paper.
· Single space.
· Use Arial 12 font.
· Include a header with your name on each page.
· Do not retype the problem.
· Do not include a table of contents.
· Clearly structure your response to correspond to the structure of the assignment (e.g., “Part B, Q. 1”).
· Use the marking template at the end of the exam to record multiple choice and true/false responses. These questions require only a letter or one-word response answer. For example:
1. c
2. true (or just t)
Part A – MULTIPLE CHOICE and TRUE/FALSE (1 mark each x 15 questions = 15 marks). Choose the one alternative that best completes the statement or answers the question.
1. What type of audit report indicates that the financial statements have not been presented fairly?
a. A disclaimer of opinion.
b. An unqualified report.
c. A qualified report.
d. An adverse opinion.
2. Which of the following statements is false?
a. Annual reports must include three-year audited balance sheets and two-year audited income statements.
b. The balance sheet is prepared on a particular date.
c. Interim statements are generally prepared quarterly.
d. When a parent company owns more than 50% of the voting stock of a subsidiary, the financial statements are consolidated for both entities.
3. According to Fraser and Ormiston, which of the following items should be considered when analyzing accounts receivable and allowance for doubtful accounts?
a. The relationship among changes in sales, accounts receivable and the allowance for doubtful accounts.
b. A comparison of actual write-offs relative to amounts recognized as bad debts.
c. An analysis of the “Valuation and Qualifying Accounts” schedule required in the Form 10-K.
d. All of the above.
e. b and c.
4. Using FIFO during a period of inflation would result in net income being overstated relative to the LIFO method. (True/false)
5. The best measure to determine how well a firm operate within its industry is a. Gross profit. b. Operating profit. c. Earnings before taxes. d. Net profit.
6. The characteristics of management accounting information include (choose one) a. past information that is accurate and verifiable. b. information that is available either monthly, quarterly, or annually. c. standard information whose format is determined by the International Accounting Standards Board and the Institute of Management Accountants to enhance comparability across organizations. d. a focus on future activities and decisions.
7. The use of multiple-performance measures in the Balanced Scorecard would be expected to lead to all of the following EXCEPT:
a. more extensive use of financial measures such as cost and profit.
b. employees recognizing the interrelated dimensions of their work.
c. the use of new performance measures such as customer satisfaction and employee morale.
d. group-level performance measures.
8. A strategy MOST LIKELY to reduce the break-even point would be to:
a. increase both the capacity-related (fixed) costs and the contribution margin per unit.
b. decrease both the capacity-related (fixed) costs and the contribution margin per unit.
c. decrease the capacity-related (fixed) costs and increase the contribution margin per unit.
d. increase the capacity-related (fixed) costs and decrease the contribution margin per unit.
9. The major reason for using practical capacity as the denominator for activity driver calculations is to:
a. avoid distortions created by the assignment of unused capacity costs to the products produced or customers served.
b. simplify the calculations of the activity cost drivers.
c. reduce the cost of unused capacity.
d. place less emphasis on the cost of unused capacity.
10.Which of the following statements about activity-based costing is NOT true?
a. ABC is useful for allocating marketing and distribution costs.
b. ABC is more likely to result in major differences from traditional costing systems if the firm manufactures only one product rather than multiple products.
c. ABC seeks to distinguish batch-related, product-sustaining, and business-sustaining costs, especially when they are not proportionate to one another.
d. ABC differs from traditional costing systems in that products are not cross-subsidized.
11.A performance measurement system should accomplish all of the following except:
a. communicate the company’s strategy.
b. motivate employees to achieve strategic objectives.
c. identify financial measures to evaluate an organization’s intangible assets.
d. help managers allocate resources to the most productive alternatives.
12.An objective of the Theory of Constraints is to maximize the volume of production or workflow by managing the bottlenecks in a process. (True/False)
13.In target costing, supply chain management is an important means to resolve cost reduction problems. (True/False)
14.Which of the following statements is TRUE regarding capacity resources?
a. Raw materials and supplies are examples of intermediate-term resources.
b. Flexible resources are usually purchased to acquire intermediate-term capacity.
c. Long-term capacity resources are expensive and referred to as committed resources.
d. b and c
15.The PRIMARY reason for using cost variances is:
a. that they diagnose the cause of a problem and what should be done to correct it.
b. for superiors to communicate expectations to lower level employees.
c. to administer appropriate disciplinary action.
d. for financial control of operating activities.
Part B – Short Answer (10 questions; 50 marks). Supporting calculations must be provided to receive full marks.
1. (3 marks) Outline the effect of ‘perspective’ on the development of a conceptual framework for financial accounting. Give an example of how a difference in perspective can inform development of accounting standards within such a framework.
2. (4 marks) Assume that Jones Company has no opening inventory. The following purchases of inventory occurred during the year:
Date Purchase (units) Purchase Price per Unit
Jan 2. 2 $3
Feb. 15 3 $5
March 30 4 $7
July 29 6 $6
If Jones uses the average cost method of inventory valuation and sells three units in August, what is the dollar amount of its ending inventory?
3. (5 marks) Smith Company purchases equipment for $20,000. Management estimates that the equipment will have a useful life of five years and salvage value of $5,000. Calculate depreciation expense and net book value at the end of the second year using the double-declining balance method of depreciation.
4. (6 marks) Consider the following information:
Net income $200
Purchase of property and plant 90
Depreciation expense 50
Payment of cash dividends 25
Cash dividends received on shares recorded as
equity investments 30
Issue of capital stock 30
Increase in long-term debt 100
Decrease in inventories 10
Decrease in accounts payable 20
Repurchase of company’s shares for cash 100
Calculate cash flow from (used by) operating activities.
5. (4 marks) Sam’s Boxes currently makes one type of cardboard box. Annual output is 100,000 boxes. An outside supplier has offered to supply all of the needed boxes. A cost analysis revealed the following avoidable unit costs if this offer was taken:
Direct materials $0.25
Direct labor 0.03
Unit-related support costs 0.10
Batch-related support costs 0.12
Product-sustaining support costs 0.22
Business-sustaining support costs 0.28
Total cost per box $1.00
Calculate the maximum price that Sam’s Boxes should be willing to pay for each box from the outside supplier.
6. (6 marks) Jared Inc. is considering replacing its existing photocopier with a new one. The new system offers considerable operational savings. Information about the existing and new systems is as follows:
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Existing
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New
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Original cost
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$12,000
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$15,000
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Annual operating expenses
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$3,500
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$2,500
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Accumulated depreciation to date
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$7,000
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0
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Current salvage value
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$2,000
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$15,000
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Remaining life
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5 years
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5 years
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Salvage value in 5 years
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$0
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$5,000
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Annual depreciation expense
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$1,000
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$3,000
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ShouldJared Inc. replace the existing photocopier with the new system?
7. (3 marks) Amity Plastic Manufacturing is a small plastic products manufacturer. The company uses machine-hours as the single, plant-wide predetermined cost driver rate to allocate manufacturing support costs to the various jobs contracted during the year. The following estimates are provided for the coming year for the company and for an order for Swift Food Processing Ltd.:
Amity Swift job
Direct materials $40,000 $1,000
Direct labor $10,000 $ 200
Manufacturing support costs $30,000
Machine-hours 100,000 900
What are the total estimated manufacturing costs for the Swift Food job?
8. (6 marks) Steve’s Salvage plans to salvage scrap metal and other materials from an old industrial site. The current owners of the site will sell the site to Steve’s for $100,000. Steve’s intends to extract scrap metal at the site for 24 months. It then will clean up the site, return the land to useable condition, and sell it to a developer. Projected costs are:
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Fixed
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Variable
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Initial outlay
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Purchase land
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$100,000
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Months 1-24
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Metal extraction and processing
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$5,000 per month
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$110 per ton
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Months 1-27
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Rent on temporary buildings
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$4,000 per month
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Administration
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$9,000 per month
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Months 25-27
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Cleanup
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$27,000 per month
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Land restoration
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$1,048,000 total
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Assume Steve’s Salvage expects to salvage 40,000 tons of metal from the site, and can sell the metal for $190 per ton. If the company wants to earn a profit of $40 per ton, at what price must it sell the land at the end of the project to achieve its target profit per ton? (Ignore the time value of money.)
9. (6 marks) At the beginning of the year, Acme Corporation initiated a quality improvement program. Theprogram was successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program, the following data were collected for the current and preceding years:
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2012
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2013
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2014
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Warranty and repair
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50,000
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40,000
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25,000
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Reliability engineering
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$10,000
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$15,000
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$25,000
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Product acceptance
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10,000
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9,000
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7,000
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Quality training
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2,000
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5,000
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8,000
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Packaging inspections
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3,000
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5,000
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5,000
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Re-inspection
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65,000
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48,000
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29,000
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Customer complaints
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85,000
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62,000
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51,000
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Rework
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25,000
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18,000
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12,000
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Sales revenue $1,250,000 $1,262,500 $1,350,000
Prepare atrendreport that shows total cost for each year for each cost of quality category. What conclusion(s) can be drawn from this?
10.(7 marks) Cancun Company is preparing a flexible budget to determine why operating profit fell below the budgeted amount. Complete the following table and list three possible reasons for the variance between budgeted and actual operating profit.
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Master Budget
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Flexible
budget
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Actual Results
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Variance
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Sales volume (in units)
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20,000
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18,500
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18,500
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Sales Revenue
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$1,050,000
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$972,000
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Variable costs
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500,000
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477,000
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Contribution margin
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550,000
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495,000
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Capacity-related (fixed) costs
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380,000
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385,000
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Operating profit
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$ 170,000
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$110,000
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Part C – Problems (2 problems, 35 marks in total). Supporting calculations must be provided to receive full marks.
1. (15 marks) Ed’s Enterprises has been using a traditional activity-based costing system. The company is switching to time-driven activity-based costing. The current system assigns $600,000 of committed resource costs in the purchasing and receiving department. There are 10,000 hours of useful work time available (practical capacity). Based on interviews with purchasing and receiving personnel, the following information has been gathered:
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Activity
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Time percentage
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Estimated cost driver quantity
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Unit time in hours
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Receiving materials
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10%
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400 supplier deliveries
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3.50
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Preparing purchase orders
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75%
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8,000 purchase orders
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0.75
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Moving materials in bulk
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15%
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450 material moves
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3.0
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100%
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a. Compute the cost driver rates using traditional ABC.
b. Compute the time-driven ABC cost driver rates.
c. Determine the resource costs assigned under each method and any unassigned costs.
2. (20 marks) Jamaica Me Crazy Products sells coffee in the southern hemisphere. The company is planning its cash needs for the month of July. In the past, Jamaica has had to borrow money during July to purchase inventory in anticipation of peak coffee sales in August. The following information has been assembled to assist in preparing a cash flow forecast for July.
a. July forecast income statement:
Sales $40,000
Variable expenses (cost of goods sold) 24,000
Contribution margin 16,000
Fixed selling expense 7,200
Fixed administrative expense 5,600
Net operating income $ 3,200
b. Sales are 20% for cash and 80% on credit.
c. Credit sales are collected over a three-month period with 10% collected in the month of sale, 70% in the following month, and 20% in the second month following sale. May sales totaled 30,000 and June sales totaled $36,000.
d. Inventory purchases are paid for within 15 days. Therefore, 50% of a month’s inventory purchases are paid for in the month of purchase. The remaining 50% is paid in the following month. Accounts payable for inventory purchases at June 30 total $11,700.
e. The company maintains its ending inventory levels at 75% of the cost of the merchandise to be sold in the following month. The merchandise inventory at June 30 is $18,000. August sales are budgeted at $70,000. (See July sales for cost of goods sold percent).
f. Land costing $4,500 will be purchased in July.
g. The cash balance on Jun 30 is $8,000; the company must maintain a cash balance of at least this amount at the end of each month.
h. The company has an agreement with a local bank that allows it to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $40,000. The interest rate on these loans is 1% per month, based on the loan balance at the end of each month. There are no loans outstanding at June 30. Assume that interest is paid when the loan is repaid.
i. Fixed administrative expenses include $2,000 per month of depreciation expense.
Prepare a cash flow forecast and appropriate supporting schedules for the month of July.
Template for Part A
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